Cryptocurrency Venues: Segmentation, Fees, and Tax Policies

56 Pages Posted: 1 Jun 2022

See all articles by Kerry Back

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business

Oguzhan Celebi

Massachusetts Institute of Technology (MIT) - Department of Economics

Ali Kakhbod

University of California, Berkeley

A. Max Reppen

Boston University - Questrom School of Business

Date Written: May 2022

Abstract

We study interactions between cryptocurrency trading venues, traders, and taxation in which the venues differ in technology (fast vs. slow). The property distinguishing this market from other markets like equities is the fact that each venue clears trades separately from one another. We show that trading fees rise when the venues are technologically differentiated. Improvements in the slow venue’s technology is associated with greater trading volumes, whereas improvements in the fast venue’s speed has an ambiguous impact. When the two venues have similar technologies, differentiation has a positive effect on trading volumes. Our welfare analysis suggests that in equilibrium, the tax rate to optimize tax revenue depends only on trader preferences, and it is thus independent of the venue properties and competition. When the government assigns different weights to its revenue, trader welfare, and venue welfare, the aggregate welfare can have a maximum for nontrivial tax rates.

Keywords: Digital economy. Crypto market. Fragmentation.

JEL Classification: C7, D86, G2, L13, L86.

Suggested Citation

Back, Kerry and Celebi, Oguzhan and Kakhbod, Ali and Reppen, Anders, Cryptocurrency Venues: Segmentation, Fees, and Tax Policies (May 2022). Boston University Questrom School of Business Research Paper No. 4119978, Available at SSRN: https://ssrn.com/abstract=4119978 or http://dx.doi.org/10.2139/ssrn.4119978

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Oguzhan Celebi

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

Ali Kakhbod (Contact Author)

University of California, Berkeley ( email )

Haas School of Business
2220 Piedmont Ave
Berkeley, CA 94720
United States

Anders Reppen

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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